World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Chairman Bernanke was forthcoming yesterday when he stated that loose monetary policy distorts the economy and leads to inflationary pressures. I’ll contend that the world would today be a safer place if “easy money” in fact always led to inflationary pressures. In reality, some of history’s most notorious Bubbles developed in an atypical environment comprising loose monetary policy and well-anchored consumer price inflation. One can look to the seemingly sanguine pricing backdrops in the U.S. during the “Roaring Twenties” and Japan in the eighties as cases in point. In both circumstances, a misdiagnosis of the Credit and financial backdrop was instrumental in policymakers remaining too loose for too long - and unwittingly accommodating precarious Bubble dynamics.

The U.S. economic recovery has achieved some momentum, risk markets are quite strong, the liquidity backdrop is amazingly robust, the banking system stable – and the Fed has nonetheless committed to sticking with near-zero rates for at least several more years. To be sure, market participants are anything but oblivious to the fact that they enjoy both ultra-loose liquidity conditions and a Federal Reserve eager to implement additional quantitative easing in the event of renewed economic weakness or market stress. It makes the old “Greenspan put” rather child’s playish.

In such a speculative marketplace, bubbling risk markets provide a powerful incentive that forces believers and non-believers alike to hop aboard. Increasingly, it’s a marketplace where everyone is being forced to become a trader with a short-term performance and trend-following focus. Attention to risk is proving too excruciating. For this phase of a historic Bubble cycle, it has been more a case of the Federal Reserve inciting rather than just accommodating Bubble Dynamics.

The Fed and global policymakers have fashioned a decidedly unlevel playing field. A distorted market incentive structure has fomented yet another bout of self-reinforcing risk-taking and speculation. Not all that many weeks ago, the global financial system was being rocked by de-risking and de-leveraging dynamics. Leveraged long positions were being reversed, which – in global markets dominated by leveraged speculation – was quickly leading to serious market liquidity issues. At the same time, markets were inundated with derivative-related selling, as players across the globe implemented strategies to hedge against various risk scenarios. With increasingly illiquid markets unable to withstand such selling pressure, global policymakers responded with resolve.

* * * *

It is understandable to be confused by such strong market performance in the face of major global structural issues and attendant risks. I would argue that markets have turned highly speculative specifically because of the deep structural issues confronting global policymakers. Last year the efficacy of policy measures notably dissipated (in Europe and here with QE2), provoking only more aggressive policy interventions. The markets are now responding to the unprecedented liquidity backdrop – and the reality that global policymakers have become hostage to the markets. Risk concerns have evaporated, and ebullient traders are referring to “the sweet spot.”

Not for a minute have I ever believed that the proliferation of derivative trading would end well. When a meaningful part of the marketplace moves to implement hedging strategies (as was the case again last year), the market will immediately find itself both prone to illiquidity and vulnerable to trend-following selling pressure. And, as we’ve seen, when policymakers then aggressively intervene to stem deepening market stress, markets abruptly become susceptible to a destabilizing reversal of hedging-related exposures. The unwind of both hedges and bearish short positions creates a powerful burst of (panic) buying power and marketplace liquidity. In short order, dangerously illiquid markets can be transformed into abundantly – I would argue, overly – liquid. And there is nothing like the specter of a buying panic associated with a major short squeeze to really empower the markets’ animal spirits. Nervousness and risk aversion are so second-half 2011.

The NYSE Financial Index is already up 13.6% year-to-date. Bank of America has gained 41%, Citigroup 27%, and JPMorgan 15%. Morgan Stanley and Goldman Sachs have jumped 34% and 30%, respectively. The S&P500 Homebuilding index has a 2012 gain of 20.9%. The Morgan Stanley Cyclical index is up 16.0%. The small cap Russell 2000 has gained 12.2% and the S&P400 MidCap Index has jumped 10.5%. The Morgan Stanley High Tech index is already up 14.0%, and the Nasdaq100 closed today at the highest level since early-2001.

* * * *

I’ve been at this for awhile, so you won’t hear me calling for the imminent demise of this Bubble. I will, however, continue to warn that when this one blows there will be hell to pay. And what a fascinating juncture for the marketplace to so emphatically embrace risk-taking. Especially with readily available derivative risk protection, it is indeed rational for players to aggressively play the (policy-induced) global risk market rally – with one eye on buying cheap risk insurance. And I will assume the sophisticated global speculators will play this for all its worth (multi-billions, literally) – with an eye on the exits in the event Europe begins to unravel. Policymaker efforts to avoid a system blowup have created a backdrop conducive to a destabilizing speculative blow-off. And the Fed can still somehow trumpet “stable prices.”

Friday, February 3, 2012

Now my alarm clock didn't blare Sonny and Cher singing " I got you babe " this morn , but i swear it's still Ground hog Day again ! First things first - didn't we go through the whole Greek Second Rescue Deal is just days away yesterday ? I mean the deal was going to be reached by Friday - yet now we see it's still in the just days away mode as we learn further details on the talks. for example , the Troika has told the finance and Labor Ministers that the country's labor system must be cut to the bone - to the tune of salaries and pensions being cut 25 percent ! Yup , those were the glad tidings the Troika dropped on temporary PM L-Pap , who then was given the joyful task of relaying that to the political party chiefs ! How might that be received by New Democracy , Pasok and Laos ? Well , i can't say for sure - but what I do know is that the critical meeting between L- Pap and the party chief ( which has slipped from Wednesday to Thursday , from Thursday to Friday , then from Friday to Saturday ! If you think that is a good sign of how the good news L-Pap has to share will be received by the major greek parties - i have a bridge for sale just for you ! Meanwhile the PSI talks are in suspended animation , no one has a clue what the official creditors such as the ECB will do ( if anything to ease Greece's pain ) and NOW the talk is that the ECB and IMF may have to give Greece a bridge loan to cover the March 20th bond payments of 14.5 billion euros. while today is Febuary 3rd , Greece is still living Ground hog Day all over again !

The tragic events in Egypt where at least 74 people were killed , many crushed to death in the panic surrounding a riot after a soccer match , underlines that Egypt has been in ground hog Day mode almost a year after their revolution began ! Police have been accused by one group of fans at the match of allowing rivals to attack them - allegedly due to the belief that the victims had supported the protests over the past year, first against former President Mubarak , now against the Military government ! The more things change , the more they stay the same ? Or is it the more things stay the same , the reality is that no change has occurred at all ? Or perhaps let's just say Egypt is living Ground Hog Day - for about a year and counting ! Cosmetic changes have been made ( Port Said's Security chiefs and Governor have bee suspended ) , but the deeply unpopular interior Minister remains in place - this won't appease those protesters , thus the fuzzy mammal has been brought out in full view. 6 more weeks of winter , death and bloodshed lie in wait for Egypt . Syria is living a Ground Hog Day existence - the Arab League and European resolution for Assad to step down lies in limbo. Homs remain under daily attack - a virtual war zone continues day after day. Life in Homs is beyond desperate - families hunker down , scramble out ( risking life and limb to find food ) , wondering if supply routes will be cutoff and all food and water removed from their grasp. Meanwhile , back at the UN , China and Russia black the resolution pushed by the Arab League. Naturally Russia wants to cut off any foreign military adventures from jumping of - as per Libya.

Iran is definitely living La Vida Ground Hog Day - ongoing threats of an attack of their nuclear facilities , which go back to the era of Bush - Cheyney continue. Most recently , Defense Secretary Panetta opined that an Israel attack could happen in April , May or June - again these ongoing threats have occurred off and on since 2007. Of course back in 2007 , there wan't an oil embargo in place nor were there sanctions directed against Iran's Central Bank - while time will tell how seriously those sanctions will be ( with signs of rebellion from India , Turkey , China and Russia to carrying the water for the West. Heck , even Iraq plans to seek a waiver from the US promulgated Iran sanctions ) , the fact that they will impact iran's economy to some degree is concerning sign of escalating tension in the Persian Gulf. A false step by any party in play here , a mistake in judgment , a false flag attack - just a spark is needed to se the region on fire. War in the Middle East , civilians killed by marching Armies - very much in tune with living La vida Ground hog Day. So as we head into the morning and US Non Farm Payroll data ( more questionable data to give CNBC something to cheerlead over ) , keep in mind things are in the same mode , but the promise of better days is just " days away " Cheers !

Thursday, February 2, 2012

Hey , where ole fuzzy Phil ? As best I can tell , today is a replay of yesterday - Olii Rehn is out declaring that the Greek debt swap should be concluded in " coming days " . Deutsche Bank chief Josef Ackermann is stating Greek aid is now less dependent on banks but on " others " ( translation - hedge funds ) but we already knew that ! Ackermann further added the "present " haircut on Greece is 70 percent or more - and that if the country fell then Portugal could be next..... again , nothing new here , been there , discussed that , same jibber jabber we've heard repeatedly. Speaking of jibber jabber , Jean - Claude Juncker ( head of the EuroGroup ) now believes the measures from the January 30th Summit are largely insufficient and the Greek PSI ( debt swap ) talks are ultra difficult - what can one say to that other than " No Shitte Sherlock ?But that statement from Juncker explains of course why EU officials have scheduled a meeting of the EuroGroup for Monday to - discuss the second bailout program for Greece . More largely insufficient measures on the way I'm sure....

Actually I'm surprised that equities in Europe aren't flying today. Merkel is stumping up money in china today - and Chinese Premier is making the right type of noises ( we've heard these noises before of course ) that it is important to resolve the eurozone debt crsis. and that his country is considering greater involvement in the EFSF and ESM ( what - DAX , CAC and FTSE aren't up a hundred points on those comments ? ) Of course Wen then added " Europe must rely on itself , reduce its debt load and introduce structural reform. " Hmm , purse strings still drawn shut as far as I can tell !

Greece' herd of kitties masquerading as a Government say they have completed the bulk of the talks with the Troika - just a few items left unresolved , just 3 or 4 sticking points left say government spokesman Kapsis - of course the problem is the " 3 or 4 sticking points " are the minimum wage , supplemental pensions and recapitalization of the Greek Banks ! those are kinda big problems that remain unresolved - and this is far along the road to see they're still unresloved. just another example of Ground Hog Day playing out. And of course , until the Greek Rescue talks are completed for 130 billion euros ( or is it 145 billion euros ) , we don't actually get the details on the alleged deal on the PSI ( is the haircut 70 , 72 or 79 percent and who is going to go along with the deal anyway ? )

British Eurosceptic MEP Nigel Farage stormed out of a European Parliament session on Wednesday night after his speech was interrupted by the German chairman.

The rightwing UK Independence Party (UKIP) leader was cut off when he compared the leaked German plan for Greece’s finances to be managed by Brussels to being like the Second World War Nazi occupation of the country.

Farage said the plan would see “a European commissioner and his staff occupy a big building in Athens and take over the running of the country”.

This commissioner would be nothing more than a "Gauleiter", he added, referring to the regional Nazi party leaders of the Third Reich.

The comparison sparked outrage among German MEPs. A German Green Party lawmaker, Reinhard Buetikofer, accused Farage of spreading “hatred between European peoples”.

“Greece is not a failing subsidiary company where head office needs to come in and take control," Farage also said. "Greece is a nation with a soul, a nation with pride, with history."

He then turned his attentions to the Belgian head of the European Council, Herman Van Rompuy, accusing him of being responsible for the “misery in these countries”, referring to the so-called PIIGS countries, Portugal, Ireland, Italy Greece and Spain.

Wednesday, February 1, 2012

Good morning ! Today is Wednesday and much of the new of the day reflects similar topics from tuesday. A greek private debt swap is still just days away , the second rescue is just days away - of course Friday is just away as well ! whether stocks flit up or sink down , the trend is that the greater issues of the day remain unresolved - day after day. A new normal ? A bad dream ? Or just the new human condition of imposed dread , fear mongered hysteria and general doldrums.

Considering Greece received a bailout in 2010 ( which was resolve everything but of course did not ) and has been attempting to receive its second dollop of rescue funds ( 130 billion or 145 billion euros worth of dollop ) , what has changed for the greek people ? Based on the data from yesterday , the greek people have a million reasons to be irate - that was the most recent number of unemployed greeks as per October data ! A 19.2 percent jobless rate , with more harsh austerity just around the corner. Considering the efforts and track record of the Troika to date to " save " Greece , thank God the idea of a Budget Commissioner has failed ( for now ) , as one could expect Greece to swiftly overtake Spain's jobless rate of 23 or 24 percent ( depending on which day of the week you listen to the Spanish Finance Minister .

After weekends of frenzied talks , the debt swap is supposed done , it just needs to be announced - so they say. A " voluntary " 70 ( or is it 80 percent ) haircut , which somehow is not a credit event is in the bag , as long as the greek political parties play ball with the Troika. Greece's Prime minister Lucas Papademos , setting up his second planned ( or is it an emergency ) meeting on Wednesday or Thursday with the three major parties , two of which are resistant to another round of the endless austerity. The battle line for now seems to be the Troika demand that the minimum wage be cut ( sweeteners to make this bitter medicine go down are Troika hints it will drop opposition to their present attacks on the summer and holiday bonus pay .) At present , New Democracy and Laos are strongly opposed to any reduction to the minimum wage - as are the Unions and even Employer Groups. Let's see how long the resistant stands - after all , once these rescue and debt swap talks are wrapped up , the parties can focus on the April elections - New Democracy if it wins may just dump various austerity measures anyway - the political calculus may be agree for now , get the Troika out of the hair for now , win the election - and then do what you plan to do anyway.

The troubles in Greece are just a precursor for what will come the way of Portugal ( next in line probably ) , Spain ( 23 or 24 percent unemployment and a massive real estate mess ) and Italy ( 120 percent debt to GDP and a so called plan to reduce debt 3 percent a a year to achieve 100 percent debt to GDP by 2020. Meanwhile , their debt issuance is third in the world , trailing only the US and Japan - borrow to reduce debt , sounds like a plan. ) Greece is a test run , as will be Portugal. Spain and Italy will be a greater experiment - might that be when we see fiscal union rammed down the throats of Europe ? And following in the same path , we can see France lurching toward a bailout of some form or fashion - 2013 perhaps ?

Overnite manufacturing data for January improved in China ( 50.5 as compared prediction of some shrinkage ) , the UK ( 52.1 as compared with expectations of 50 ) and Germany ( 51 as compared with 48.5 in December .) However , Greece manufacturing data was dreadful - 41 ( down from 42 in December ) , France dropped to 48.5 from 48.9 indicating contraction , Italy still showing a contraction level of 46.8 ( although up from 44 in December ) and spain shows a lousy 45.1 ( but better than 43.7 in December .) Switzerland and the Czech Republic also showed shrinkage For now the winners and losers in europe are clear - chinese data , believe what you choose to believe with their data ( kind of like US data. )

US dat today is the ADP report out shortly , ISM data ( should be interesting after Tuesday's mis on manufacturing and Auto sales data. US futures are higher , Europe Bourses are higher , commodities are higher. ADP just out , 170, 000 private jobs for January supposedly created - we shall see what NFP fiction we see Friday ( but watch out for the annual revisions - do we lose another 300,000 jobs allegedly created last year ? Very hard to believe small and medium businesses are leading the job creation brigade , not these days. As a contrary report to note , Trim Tabs predicts just 45,000 new jobs for Friday - we shall see how the prediction match up with the official data. As we head further into the political season , take all of the government data with a larger pinch of salt - a wide discrepancy between data and reality exists . That is likely to follow trend.

So , there we are , another day , another morning ramp. Tread lightly , it is very treacherous time to invest / speculate / trade as the markets are broken and understand who is the sucker at the proverbial poker table !

European Bailout Infographic: Presenting The Truckloads Of Cash Needed To Rescue The Insolvent PIIGS

... No, literally truckloads. Our friends at demonocracy.info have been kind enough to put together an infographic that explains the European bailout in simple, visual terms, that even the most innocent of FTL truckers can grasp without much exertion, for the simple reason that it shows all the bailouts amounts in terms of trucks of cash. And here is the kicker: one would need a 13 lane highway, filled with trucks bumper to bumper, stretching for about 3 kilometers to represent the €2.91 trillion in total amounts owed by the PIIGS and their citizens (Click the link above for great info graphics , not that we should worry about this , right ? )

Well , a brief rehash yesterday's Summit where nothing much got accomplished which wasn't already expected - the ESM got approved ( details to be supplied later ) , the fiscal compact was approved ( by 25 out of 27 countries - meaning its not legal under EU law as a binding treaty for the 27 country EU and naturally it has been watered down to boot ) , nothing has been accomplished with Greece ( second bailout and PSI deal coming in days , wait for Godot continues. ) Sarkozy continued to make a fool of himself ( starting a fresh row with the UK by saying at one point that the UK had lost its industry ) , vainly trying to convince voters in France he's worthy of a fresh term in office ( one knows a wrecking hates to stop swinging until the building is totally demolished .)

Speaking of Greece , allegedly , the long awaited debt swap supposedly is coming to a head - with a coupon perhaps as low as 3 percent ! Good for Greece , very tough for private investors - naturally the devils will be in the details. At 3 percent and depending on the duration of the payout , the haircut could hit 80 percent ! Which means some of the hedge funds likely will litigate. And of course since 100 percent participation is required , that means Greece will have to pass some type of Collective Action Law to cram down those unwilling to take the sledge hammer write down voluntarily ! Which means CDS finally get triggered - which benefit the basis traders ( traders holding Greek bonds bought fairly recently at cheap prices with greek CDS as a hedge ) And of course the battlefield for the hedgies will be those bonds maturing on March 20th , which allegedly is held by hedgies seeking full payment. Can you say massive game of chicken going on ? And the talk of the ECB and IMF taking a haircut - seems to have vaporized , I guess ( like that MF Global customer money ) Speaking of other fables , Greek PM L-Pap say not only must the PSI talks get wrapped up this week , but the overall greek bailout 2 talks must be completed as well ( 130 or 145 billion euros ? ) Wonder how that gets wrapped up when Germany has said no further sovereign contributions above the 130 billion mark will be forthcoming - I guess the details will be coming late , along with Godot.

One last item , a chart of the day . european unemployment . Good news for Germany , bad news for the eurozone and Italy. Germany sees its unemployment drop to 6.7 percent , a twenty year low. Meanwhile for Italy , the numbers has hit 8.9 and the eurozone at large - 10.4 percent . Youth employment remains staggeringly high across the Eurozone. Here is the chart , read it and weep . Happy Tuesday everyone :

Monday, January 30, 2012

Good morning ! Today is the latest chapter in the ongoing Summit saga for the slow burning Europe in Crisis soap opera. Coming on the heels of the last Summit in December , today we have the heads of the European Council meeting to once again attempt to fool markets that they are capable of solving a problem beyond their grasp - good luck to that ! In the run up to the Summit , activity was frantic - we saw the EU impose a oil embargo on Iran - not effective until July 1st for pending contracts ( so that the crumbling economies of Greece , Spain and Italy just didn't flatline immediately. It remains to be seen what retaliation , if any , comes from the Iranian threat to block exports to Europe or some countries in Europe ( probably Greece , Spain and Italy earlier than the EU plan .) Fitch downgraded various countries in the Eurozone on Friday - Italy , Spain Slovenia saw their credit ratings cut two levels , Cyprus and Belgium saw their credit ratings cut one level - the reaction in the euro was it actually rose as this was discounted by markets !

The private investor debt swap negotiations creep onward with imminent deal , good progress , close to a deal announcements predictably provided . as of this morning , no announcement has been made as to an actual deal being reached nor have any specific terms been announced - the imminent deal will imminent tuesday as well. Probably the biggest announcement was the leaked paper , attributed to Germany , that for Greece to get its second bailout of 130 billion euros ( or is it 145 billion euros ) , they must relinquish control over their budget to a Troika selected Budget Commissioner and pledge to repay debt first before any other governmental spending would be allowed. the predictable fire storm from Greece has threatened to overwhelm any productive outcome from the latest faux Summit. As it stands presented - no PSI deal , no Greek rescue deal . expect an announcement that the ESN has been agreed , expect an announcement that the idea of a Fiscal Compact has been agreed - details to be supplied later of course !

As one would expect , the uncertainty is somewhat reflected in stocks and commodities ( moderately lower for the major Bourse in Europe , notably lower for US Futures , gold and silver off so far ) , risk off is better expressed by looking at CDS in europe , as follows :

Between disappointing news from Shanghai and the confusion from Europe , various Bourses saw red - Shanghai was off 1.47 percent , the Hang Seng was off 1.66 percent , the BSE was off 2.15 percent , Jakarta was off 1.79 percent , the Strait times was off 1.24 percent and Seoul was off 1.24 percent. The Lunar Holiday is over and Asian investor clearly had a tad of a hangover - Japan and Australia were not as gloomy , off just .54 and .32 percent respectively.

So , where are things presently ? Greece's Prime Minister is warning that the country is on the brink and faces the spectre of bankruptcy and all of the dire consequences that ensue - unless the country's international backers agree to a new bailout. Ireland is warning its votes that if a referendum is required on the new fiscal Compact and the voters vote no , Ireland might have to leave the Eurozone. meanwhile , German Finance Minister Schauble has confirmed that a bigger contribution from public sector creditors as part of any Greek debt deal is not up for discussion at the Summit. Sarkzozy has pledged to institute a Finance Transaction Tax in France ( conveniently set to start in August , after the French elections ) , the Spanish Prime Minister has pledged to pass a decree on further bank restructuring next month. So , in sum , we see promises , threats , decrees coming forth , austerity as high as an elephant's eye and taxes being imposed flying into a european recession . Great for confidence.

So , as we see another Summit come and go - have the caters started working on the menus for March yet - the next big summit , we grind to the eventual and inevitable default in Greece. Equities grind lower after personal spending was flat last month ( income allegedly up 0.5 ) Portugal is still grinding toward a second bailout as its debt continues to move wider day after day. And a third Aircraft Carrier has been deployed to the Persian Gulf. Stay tuned - will other events eclipse the eventual and inevitable blow ups of sovereigns states in Europe ? who really knows - just bukcle up , its going to be a bumpy ride !